A bit like the Artful Dodger in Charles Dickens 'Oliver Twist', the Australian economy has dodged and weaved the technical definition of a recession (that is, two consecutive quarters of negative economic growth) for a record 29 consecutive years. It is a feat lauded universally by other OECD countries. It has now come to an end.

The Q1 GDP result was a decline of 0.3% from the previous quarter. This is a combination of bushfires and the initial impact of COVID-19 restrictions which started in the back-end of March. What it also clearly illustrates is that the economy and households were already in a parlous state coming into COVID-19 as evidenced by weak household consumption and increased savings – trends which only amplified over Q2. So the decline in Q1 GDP is just an entrée to the main course disaster of Q2. Beyond this we think will be left with a bitter after-taste for some time thereafter.

The Q1 GDP result does give some insight as to where we are, but it is a 'rear vision' statistic. Whilst stimulus will have assisted this quarter, it is almost certain to be outweighed by the collapse in labour. We expect that consumption will have fallen 20% and private investment a detractor from growth; Net exports led by iron ore is the one bright spot. In all, we expect GDP to decline by a staggering 9% for Q2. That said, the economy will rebound from these historic lows. What concerns us is that output will take some time to recover to pre-COVID levels, and the path looks far from assured. A substantial recovery to 93% - 96% of output levels with borders closed and service exports largely frozen would leave significant underemployment, excess capacity and a need for sustained government fiscal support.

We have contended for some time now, that Australia has been in stagnant per capita household income growth (refer graph below) notwithstanding increasing GDP growth - a result positive to government tax receipts but otherwise a household recession. COVID-19 is a massive shock to the economy which has now finally delivered a guaranteed technical recession, but the odds were building that we were already looking at recession led by increased savings with corresponding weaker consumption. With the economy operating below capacity for a sustained period over the next 12 months, both GDP and household income will be terrible. As we noted when the government first introduced its COVID-19 relief packages, we expect that the government will need to underpin demand and bridge the gap for the next 2 to 3 years. If not, Australia will have a very difficult and long path back to pre COVID-19 levels.

Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.

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